Audited Financial Statements
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
For the period from July 26, 1996 (inception)
to December 31, 1996, the six months ended
June 30, 1997 and the period from July 26, 1996
(inception) to June 30, 1997
with Report of Independent Auditors
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Index to Financial Statements
CONTENTS
Report of Independent Auditors..............................................F-2
Audited Financial Statements
Balance Sheets at December 31, 1996 and June 30, 1997.......................F-3
Statements of Operations for the Period from July 26, 1996 (Inception) to
December 31, 1996, the Six Months Ended June 30, 1997 and the Period
from July 26, 1996 (Inception) to June 30, 1997..........................F-4
Statements of Changes in Partners' Equity/(Deficit) for the Period from
July 26, 1996 (Inception) to December 31, 1996 and the Six Months
ended June 30, 1997......................................................F-5
Statements of Cash Flows for the Period from July 26, 1996 (Inception) to
December 31, 1996, the Six Months Ended June 30, 1997 and the Period
from July 26, 1996 (Inception) to June 30, 1997..........................F-6
Notes to Financial Statements...............................................F-7
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Partners
Aer Force Communications B, L.P.
We have audited the accompanying balance sheets of Aer Force Communications B,
L.P. (the "Partnership") a development stage enterprise and a predecessor to
East/West Communications, Inc., as of December 31, 1996 and June 30, 1997, and
the related statements of operations, partners' equity/(deficit), and cash flows
for the period from July 26, 1996 (inception) to December 31, 1996, the six
months ended June 30, 1997 and for the period from July 26, 1996 (inception) to
June 30, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aer Force Communications B,
L.P. at December 31, 1996 and June 30, 1997, and the results of its operations
and its cash flows for the period from July 26, 1996 (inception) to December 31,
1996, the six months ended June 30, 1997 and the period from July 26, 1996
(inception) to June 30, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming Aer Force
Communications B, L.P. will continue as a going concern. As more fully described
in Note 1, the Partnership has incurred losses since inception and has not yet
adopted a business plan or determined how to finance its operations and will
need to obtain capital in the near future in order to fund its interest payment
obligations and for working capital and general corporate purposes. These
conditions raise substantial doubt about the Partnership's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 26, 1997, except for Note 4 as to
which the date is September 25, 1997
F-2
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, PRO FORMA
1996 1997 1997, NOTE 6
------------------------------------------------
------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ - $ - $ 250,000
Deposit with FCC 12,000,000 - -
PCS Licenses - 18,957,721 18,957,721
Capitalized costs - 226,210 226,210
================================================
Total assets $12,000,000 $19,183,931 $19,433,931
================================================
LIABILITIES AND PARTNERS' EQUITY/(DEFICIT)
Accrued liabilities $ - $ 926,230 $ 926,230
------------------------------------------------
Total current liabilities - 926,230 926,230
Long-term accrued liabilities - 96,490 96,490
Due to Limited Partner 1,578,500 2,977,648 -
Long-term debt:
Loan from Limited Partner 11,800,000 2,708,044 -
Loan from FCC - 15,166,177 15,166,177
Redeemable preferred stock - - 5,685,692
Common stock - - 355
Additional paid-in capital - - 449,645
Accumulated deficit - - (2,890,658)
General Partner's equity accumulated during
the development stage
84,415 71,293 -
Limited Partner's deficit accumulated during
the development stage
(1,462,915) (2,761,951) -
------------------------------------------------
Total partners'/stockholders' deficit accumulated during
the development stage
(1,378,500) (2,690,658) -
================================================
Total liabilities and partners'/stockholders' deficit $12,000,000 $19,183,931 $19,433,931
================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Statements of Operations
<TABLE>
<CAPTION>
JULY 26, 1996
(INCEPTION) TO SIX MONTHS JULY 26, 1996
DECEMBER 31, ENDED (INCEPTION) TO
1996 JUNE 30, 1997 JUNE 30, 1997
-----------------------------------------------------------
-----------------------------------------------------------
<S> <C> <C> <C>
Interest expense including commitment fees $(1,578,500) $(1,312,158) $(2,890,658)
===========================================================
Net loss $(1,578,500) $(1,312,158) $(2,890,658)
===========================================================
Net loss allocated to general partner (1%) $ (15,785) $ (13,122) $ (28,907)
===========================================================
Net loss allocated to limited partner (99%) $(1,562,715) $(1,299,036) $(2,861,751)
===========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Statements of Changes in Partners' Equity/(Deficit)
FOR THE PERIOD FROM JULY 26, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
PARTNERS'
EQUITY/
(DEFICIT)
--------------------
--------------------
Capital contributions $ 200,000
Net loss (1,578,500)
--------------------
Balance at December 31, 1996 (1,378,500)
Net loss (1,312,158)
--------------------
BALANCE AT JUNE 30, 1997 $(2,690,658)
====================
See accompanying notes.
F-5
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Statements of Cash Flows
<TABLE>
<CAPTION>
JULY 26, 1996
(INCEPTION) TO SIX MONTHS JULY 26, 1996
DECEMBER 31, ENDED (INCEPTION) TO
1996 JUNE 30, 1997 JUNE 30, 1997
----------------------------------------------------------------
----------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,578,500) $ (1,312,158) $ (2,890,658)
Interest accrued, including commitment fees 1,578,500 1,312,158 2,890,658
------------------------------------------------------------
Net cash provided by operating activities - - -
INVESTING ACTIVITIES
(Deposits with) refunds from the FCC (12,000,000) 10,104,228 (1,895,772)
Purchase of PCS licenses - (1,012,272) (1,012,272)
------------------------------------------------------------
Net cash (used in) provided by investing activities (12,000,000) 9,091,956 (2,908,044)
FINANCING ACTIVITIES
Proceeds from the issuance of loans from
the Limited Partner
11,800,000 1,012,272 12,812,272
Repayment of loans from the Limited Partner - (10,104,228) (10,104,228)
Capital contributions 200,000 - 200,000
------------------------------------------------------------
Net cash provided by (used in) financing activities 12,000,000 (9,091,956) 2,908,044
Net change in cash - - -
Cash at beginning of period - - -
============================================================
Cash at end of period $ - $ - $ -
============================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Notes to Financial Statements
December 31, 1996 and June 30, 1997
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Aer Force Communications B, L.P. ("the Partnership") was formed in July 1996 to
bid for personal communications services ("PCS") licenses in the Federal
Communications Commission's ("FCC") F-Block auction. East/West Communications,
Inc. was incorporated on August 13, 1997 and will succeed to the rights and
obligations of the Partnership. PCS is a second generation digital wireless
service utilizing voice, video or data devices that allow people to communicate
at anytime and virtually anywhere. Over the past three years, the FCC auctioned
off PCS licenses, a total of 120 MHZ of spectrum, falling within six separate
frequency blocks labeled A through F. Frequency blocks C and F were designated
by the FCC as "entrepreneurial blocks." Certain qualifying small businesses
including the Partnership were afforded bidding credits in the auctions as well
as government financing of the licenses acquired. The Partnership won five
licenses in 1997 to provide personal communications services over 10Mhz of
spectrum to a population of approximately 21 million, including Los Angeles and
Washington, D.C. Aer Force Communications Inc. is the General Partner of the
Partnership with a 50.1% equity interest. Lynch PCS Corporation F, a
wholly-owned subsidiary of Lynch Corporation ("Lynch"), a publicly held company,
is the Limited Partner of the Partnership with a 49.9% equity interest.
BASIS OF PRESENTATION
The financial statements are prepared in conformity with generally accepted
accounting principals applicable to a development stage enterprise.
The Partnership's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business and do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets and the amount and classifications of liabilities that may result from
the possible inability of the Partnership to continue as a going concern.
The Partnership believes that its PCS licenses have substantial potential.
However, the Partnership has not yet adopted a business plan or determined how
to finance its operations because of uncertainties relating to PCS. Therefore,
the Partnership has not yet determined whether to develop its PCS licenses on
its own, joint venture its licenses with other PCS or wireless telephone
licensees or operators, or sell some or all of its licenses. The Partnership
expects to continually evaluate these factors and adopt a business plan once the
financing, regulatory and market aspects of PCS are less uncertain.
The Partnership has incurred losses since inception and will need to obtain
capital in the near future in order to fund its interest payment obligations and
for working capital and general corporate purposes. The Partnership has
determined to convert from a limited partnership to a corporation (the
"Corporation") before the spin-off described in Note 6. There can be no
assurance that the Corporation can raise sufficient capital to fund its
obligations and finance the construction of its networks. Accordingly, the lack
of funding creates substantial doubt about the Partnership's ability to continue
as a going concern.
F-7
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
ADMINISTRATIVE SERVICES
The Partnership has no employees. The Limited Partner provided the Partnership,
at its request, with certain services in connection with the Partnership's
bidding for PCS licenses in the FCC auction in late 1996 through early 1997.
Aside from that matter, neither the General Partner nor the Limited Partner
provided the Partnership with a substantial amount of services. Neither partner
charged the Partnership for the services provided, as such amounts are not
significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the carrying amounts of assets and liabilities and disclosures at the
date of the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
CAPITALIZED COSTS
Interest charges including commitment fees incurred prior to the granting of the
licenses have been expensed. Subsequent to the license grant date, and until
operations commence, all interest charges and commitment fees on outstanding
loan balances will be capitalized. These costs will be amortized over the
remaining life of the respective loan when the Partnership commences operations.
Capitalized interest, included in capitalized costs, amounted to $133,793. Total
interest charges amounted to $355,638 and $1,053,804, respectively, for the six
months ended June 30, 1997 and for the period from July 26, 1996 (inception) to
June 30, 1997.
The FCC licenses will be amortized over a period, consistent with the industry
standard, not to exceed 40 years, which will begin when operations commence.
INCOME TAXES
The results of operations of the Partnership are included in the taxable income
or loss of the individual partners and, accordingly, no tax provision has been
recorded.
2. RELATED PARTIES
Due to Limited Partner represents amounts due for interest, including commitment
fees, on the loan outstanding which will be repaid according to the terms of the
loan.
3. PARTNERSHIP AGREEMENT
The Partnership was formed in July 1996 to bid for PCS licenses in the "F-Block"
auction. The General Partner contributed $100,200 to the Partnership for a 50.1%
equity interest and the Limited Partner contributed $99,800 to the Partnership
for a 49.9% equity interest.
F-8
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Notes to Financial Statements (continued)
3. PARTNERSHIP AGREEMENT (CONTINUED)
Under the terms of the Partnership Agreement all items of deduction with respect
to interest expense and commitment fees are allocated 99% to the Limited Partner
and 1% to the General Partner. All profits of the Partnership are allocated 99%
to the Limited Partner and 1% to the General Partner until the aggregate amount
of all profits allocated to the Limited Partner and General Partner equal the
items of deduction with respect to interest expense and commitment fees.
Subsequently, all profits and losses will be allocated to the Limited Partner
and General Partner in proportion to their respective interests, 49.9% and
50.1%, respectively.
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
----------------------------------------------
<S> <C> <C>
The Limited Partner loan at a fixed rate of 15% due in 2001 $11,800,000 $ 2,708,044
FCC financing of PCS licenses awarded in the following markets
and mature in 2007:
Los Angeles, CA - 3,579,000
Washington, D.C. - 7,068,000
Sarasota, FL - 1,322,400
Reno, NV - 1,429,800
Santa Barbara, CA - 1,766,977
----------------------------------------------
- 15,166,177
----------------------------------------------
==============================================
$11,800,000 $17,874,221
==============================================
</TABLE>
In connection with the PCS "F-Block" auction, $12.0 million was deposited with
the FCC of which $11.8 million was borrowed from the Limited Partner under a
line of credit which is due and payable in five years. The interest rate on the
outstanding borrowings under the line is fixed at 15%; additionally, a
commitment fee of 20% per annum is being charged on the total line of credit
which is $11.4 million at June 30, 1997. The amounts due to the Limited Partner,
including accrued interest and commitment fees, at December 31, 1996 and June
30, 1997 are $13.4 million and $5.7 million, respectively. In January 1997,
$10.1 million of this loan was repaid to the Limited Partner with the deposit
returned by the FCC.
Under a recapitalization of the Partnership that is currently being considered,
the total amount due to the Limited Partner would be converted to newly created
5% Redeemable Preferred Stock. This Preferred Stock including accumulated
dividends would be mandatorily redeemable on November 1, 2009 (See Note 6).
F-9
<PAGE>
4. LONG-TERM DEBT (CONTINUED)
All of the FCC financing bears interest at 6.25% per annum. Quarterly interest
payments of $236,972 are required for the first two years of the license and
quarterly payments of principal and interest of $605,879 are required over the
remaining eight years of the license term. These loans are secured by the
licenses granted. In April 1997, the FCC suspended the interest payments on the
debt. On September 25, 1997, the FCC indicated that such interest payments will
be resumed beginning March 31, 1998 with the suspended payments being made in
eight installments in addition to regular interest payments.
There were no cash payments for interest for the periods ended December 31, 1996
and June 30, 1997.
Aggregate principal maturities of long-term debt for each of the next five years
are as follows: 1997--$0 million, 1998--$0 million, 1999--$0.743 million,
2000--$1.558 million and 2001--$1.658 million.
5. LEGAL MATTERS
The United States Department of Justice has initiated an investigation to
determine whether there has been bid rigging and market allocation for licenses
auctioned by the FCC for PCS. The Partnership, together with various other
bidders in the PCS auctions, has received a civil investigative demand ("CID")
requesting documents and information relating to bidding, and in June 1997, the
Partnership complied with the CID. The Partnership is not aware of what further
action, if any, the Justice Department or the FCC may take and can not estimate
its exposure, if any, at this time.
6. SUBSEQUENT EVENTS
The Partnership has determined to convert from a limited partnership to a
corporation (the "Corporation") before the contemplated spin-off under which the
General Partner would receive 50.1% of the common stock of the Corporation and
the Limited Partner, would receive 49.9% of the Common Stock of the Corporation.
It is also contemplated that the partners would make an additional capital
contribution to the Partnership of $250,000 in the aggregate and that the
indebtedness (including accrued interest and commitment fees) owed by the
Corporation to the Limited Partner ($5.7 million at June 30, 1997) would be
converted into an equivalent principal amount of redeemable Preferred Stock of
the Corporation and the Limited Partner's obligation to make further loans to
the Partnership would terminate. The Preferred Stock is entitled to preferred
dividends at an annual rate of 5 shares of additional Preferred Stock for each
one hundred shares of Preferred Stock outstanding, has no voting rights except
as provided by law, and is entitled to be redeemed at $1,000 per share plus
accrued and unpaid dividends, on November 1, 2009, or earlier upon certain
circumstances. The Partnership has been informed by the Limited Partner that a
portion of the common stock of the Corporation to be received by it is expected
to be spun-off to the shareholders of its parent company.
F-10
